• Firearms manufacturer Smith & Wesson is riding an unprecedented level of demand for handguns.
• While a historically cyclical business, Smith & Wesson is making solid long-term investor-friendly decisions.
• The company remains significantly undervalued compared to its peers.

Although I primarily write on airlines for Seeking Alpha, I continually look for strong opportunities in companies that I believe do not receive the focus I believe they deserve. The enormous challenges and social changes that have taken place during 2020 have provided many investor opportunities. The entire personal recreation and sporting goods sector has seen strong demand because of COVID-19; a number of sporting goods retailers are reporting record sales. While changes in how Americans have been able to spend their leisure time has resulted in some of the revenue growth in the sector, drilling down to sales category breakouts shows that the biggest increase for retailers like Sportsman’s Warehouse Holdings (SPWH) came from increased firearm sales. Among American firearms manufacturers, Smith & Wesson (SWBI) has laid the framework for not just increased sales during the COVID-19-related lifestyle adjustments, but more importantly, as the company fundamentally strengthens on a long-term basis.

(Source: Company website)

The firearms industry has interesting parallels with the airline industry, and yet, also provides interesting contrasts. Both the firearms and airline industries have significant financial hurdles to attaining sustained profitability compared to higher-performing industries; both are highly cyclical and also face significant regulatory burdens. Both industries are generally low-margin and have faced bankruptcies and repeated merger/divestiture activity. Despite the hurdles, Smith & Wesson is an iconic leader in its industry and is taking advantage of the current environment to strengthen its financial position.

Unprecedented levels of demand

While superlatives can be easily tossed around to describe societal changes, few people will argue on January 1, 2021 against the notion that 2020 was one of the most disruptive of our lifetimes. History has shown that unease and societal uncertainty leads to increased purchase of firearms. Cyclicality of gun sales has historically been driven by the fear of gun control laws that would restrict the ability to acquire and retain firearms. 2020 has been marked by a confluence of major factors that have inflated gun sales:

1. The COVID-19 lockdown requirements and the cessation of much economic activity have left many at home for longer periods of time. While employees in many companies cannot carry firearms into their workplaces, those same employees are now working from home and are increasing their purchase of firearms to protect themselves at home. In addition, outdoor recreation sales have increased, including of hunting equipment, as other recreational activities are not available during pandemic restrictions.
2. The increase of societal unrest related to charges of police brutality and racial discrimination have resulted in crime increases and reduced police funding in many communities. Crime rates in many parts of the country have increased dramatically.
3. The 2020 election cycle and the underlying themes of crime, racial injustice, and police funding have increased the fear among many that the police will not be there when needed and second amendment rights will be increasingly the target of state and a potentially politically changed federal government.

Regardless of all of the factors, there is abundance evidence that gun sales, particularly of handguns acquired for personal defense, have soared. While many firearms-related statistics are fragmented and their release delayed relative to the date of transactions, firearm sales have soared, with retailers charging full retail prices on very low levels of inventory. Based on the author’s research, handgun training classes are seeing increased demand, with a shift in demographics from traditional middle-age male gun buyers to both younger and older buyers, and with an increase in the number of women owning their first firearm. State and federal firearms background checks as well as handgun carry permits continue to increase. FBI background checks for August 2020 were more than 30% higher year over year, representing the largest year-over-year increase for the month of August on record; June and July background checks peaked at 70-80% increases, coinciding with the beginning of a summer of highly publicized police-involved shooting cases and resulting urban riots.

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